10-Q 1 0001.txt Page 1 SECURITIES AND EXCHANGE COMMISSION WASHINGTON, D. C. 20549 FORM 10-Q [X] QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 For Quarterly Period Ended June 30, 2000 OR [ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 For Transition Period from _________________ to __________________ Commission File Number 1-12658 ALBEMARLE CORPORATION (Exact name of registrant as specified in its charter) VIRGINIA 54-1692118 ------------------------------- --------------------------------- (State or other jurisdiction of (I.R.S. Employer incorporation or organization) Identification No.) 330 SOUTH FOURTH STREET P. O. BOX 1335 RICHMOND, VIRGINIA 23210 ---------------------------------------- ---------- (Address of principal executive offices) (Zip Code) Registrant's telephone number, including area code - (804) 788-6000 Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days. Yes X No --- --- Number of shares of common stock, $.01 par value, outstanding as of July 31, 2000: 45,805,284 Page 2 ALBEMARLE CORPORATION I N D E X Page Number ------- PART I. FINANCIAL INFORMATION ITEM 1. Financial Statements Consolidated Balance Sheets - June 30, 2000 and December 31, 1999 3-4 Consolidated Statements of Income - Three and Six Months Ended June 30, 2000 and 1999 5 Consolidated Statements of Comprehensive Income - Three and Six Months Ended June 30, 2000 and 1999 6 Condensed Consolidated Statements of Cash Flows - Six Months Ended June 30, 2000 and 1999 7 Notes to the Consolidated Financial Statements 8-12 ITEM 2. Management's Discussion and Analysis of Results of Operations and Financial Condition, and Additional Information 13-19 ITEM 3. Quantitative and Qualitative Disclosures About Market Risk 19 PART II. OTHER INFORMATION ITEM 3. Legal Proceedings 19 ITEM 6. Exhibits and Reports on Form 8-K 19 SIGNATURES 20 Page 3 PART I - FINANCIAL INFORMATION ------------------------------ ITEM 1. Financial Statements -------------------- ALBEMARLE CORPORATION AND SUBSIDIARIES CONSOLIDATED BALANCE SHEETS --------------------------- (Dollars In Thousands) ----------------------
June 30, December 31, 2000 1999 ------------ ------------ (Unaudited) ASSETS Current assets: Cash and cash equivalents $17,785 $48,621 Accounts receivable, less allowance for doubtful accounts (2000 - $2,691; 1999 - $2,609) 159,685 155,140 Inventories: Finished goods 81,834 82,415 Raw materials 10,809 10,889 Stores, supplies and other 17,073 17,512 ------------ ------------ 109,716 110,816 Deferred income taxes and prepaid expenses 11,756 18,022 ------------ ------------ Total current assets 298,942 332,599 ------------ ------------ Property, plant and equipment, at cost 1,299,823 1,287,507 Less accumulated depreciation and amortization 818,374 792,122 ------------ ------------ Net property, plant and equipment 481,449 495,385 ------------ ------------ Prepaid pension costs 105,183 83,111 Other assets and deferred charges 68,177 25,102 Goodwill and other intangibles, net of amortization 15,643 17,897 ------------ ------------ Total assets $969,394 $954,094 ============ ============
See accompanying notes to the consolidated financial statements. Page 4 ALBEMARLE CORPORATION AND SUBSIDIARIES CONSOLIDATED BALANCE SHEETS --------------------------- (Dollars In Thousands) ----------------------
June 30, December 31, 2000 1999 ------------ ------------ (Unaudited) LIABILITIES AND SHAREHOLDERS' EQUITY Current liabilities: Accounts payable $61,569 $61,386 Long-term debt, current portion 305 779 Accrued expenses 48,395 50,505 Dividends payable 5,041 4,635 Income taxes payable 9,138 14,048 ------------ ------------ Total current liabilities 124,448 131,353 ------------ ------------ Long-term debt 133,703 158,981 Other noncurrent liabilities 83,742 81,185 Deferred income taxes 95,479 92,011 Shareholders' equity: Common stock, $.01 par value, issued - 45,797,694 in 2000 and 46,199,639 in 1999, respectively 457 462 Additional paid-in capital 57,008 63,904 Accumulated other comprehensive (loss) income (12,938) (9,013) Retained earnings 487,495 435,211 ------------ ------------ Total shareholders' equity 532,022 490,564 ------------ ------------ Total liabilities and shareholders' equity $969,394 $954,094 ============ ============
See accompanying notes to the consolidated financial statements. Page 5 ALBEMARLE CORPORATION AND SUBSIDIARIES CONSOLIDATED STATEMENTS OF INCOME --------------------------------- (In Thousands Except Per-Share Amounts) --------------------------------------- (Unaudited)
Three Months Ended Six Months Ended June 30, June 30, ---------------------- ---------------------- 2000 1999 2000 1999 ---------- ---------- ---------- ---------- Net sales $226,206 $200,811 $461,686 $409,156 Cost of goods sold 160,200 143,438 321,078 280,465 ---------- ---------- ---------- ---------- Gross profit 66,006 57,373 140,608 128,691 ---------- ---------- ---------- ---------- Selling, general and administrative expenses 25,822 24,549 52,008 51,200 Research and development expenses 6,219 9,093 12,467 17,516 Special items (15,900) 5,779 (15,900) 5,779 ---------- ---------- ---------- ---------- Operating profit 49,865 17,952 92,033 54,196 ---------- ---------- ---------- ---------- Interest and financing expenses (1,224) (2,847) (2,991) (5,319) Gain on sale of investment in Albright & Wilson stock, net -- 22,054 -- 22,054 Other income, net 363 167 1,336 980 ---------- ---------- ---------- ---------- Income before income taxes 49,004 37,326 90,378 71,911 Income taxes 15,191 12,713 28,017 24,126 ---------- ---------- ---------- ---------- Net income $ 33,813 $ 24,613 $ 62,361 $ 47,785 ========== ========== ========== ========== Basic earnings per share $ .74 $ .52 $ 1.36 $ 1.02 ========== ========== ========== ========== Shares used to compute basic earnings per share 45,795 47,033 45,939 47,025 ========== ========== ========== ========== Diluted earnings per share $ .73 $ .52 $ 1.34 $ 1.00 ========== ========== ========== ========== Shares used to compute diluted earnings per share 46,608 47,731 46,573 47,738 ========== ========== ========== ========== Cash dividends declared per share of common stock $ .11 $ .10 $ .22 $ .20 ========== ========== ========== ==========
See accompanying notes to the consolidated financial statements. Page 6 ALBEMARLE CORPORATION AND SUBSIDIARIES CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME ----------------------------------------------- (Dollars In Thousands) ---------------------- (Unaudited)
Three Months Ended Six Months Ended June 30, June 30, ---------------------- ---------------------- 2000 1999 2000 1999 ---------- ---------- ---------- ---------- Net income $33,813 $24,613 $62,361 $47,785 Other comprehensive income (loss), net of tax: Net change in unrealized gain on securities available-for-sale 354 (8,144) 332 -- Foreign currency translation adjustments (15) (2,836) (4,257) (13,952) ---------- ---------- ---------- ---------- Other comprehensive income (loss) 339 (10,980) (3,925) (13,952) ---------- ---------- ---------- ---------- Comprehensive income $34,152 $13,633 $58,436 $33,833 ========== ========== ========== ==========
See accompanying notes to the consolidated financial statements. Page 7 ALBEMARLE CORPORATION AND SUBSIDIARIES CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS ----------------------------------------------- (Dollars In Thousands) ---------------------- (Unaudited)
Six Months Ended June 30, -------------------------- 2000 1999 ---------- ---------- Cash and cash equivalents at beginning of year $48,621 $21,180 Cash flows from operating activities: Net income 62,361 47,785 Adjustments to reconcile net income to cash flows from operating activities: Depreciation and amortization 36,189 37,768 Special items (15,900) 5,779 Gain on sale of investment in Albright & Wilson stock -- (22,054) Working capital (increase) decrease excluding cash and cash equivalents, net (10,989) 19,259 Other, net 4,266 (536) ---------- ---------- Net cash provided from operating activities 75,927 88,001 ---------- ---------- Cash flows from investing activities: Cost of investment in Albright & Wilson stock -- (135,462) Capital expenditures (27,781) (46,795) Acquisition of business (33,000) -- Investments in joint ventures and non-marketable securities (7,381) (1,185) Proceeds from sale of investment in Albright & Wilson stock -- 157,516 Other, net 2,799 (1,627) ---------- ---------- Net cash used in investing activities (65,363) (27,553) ---------- ---------- Cash flows from financing activities: Repayments of long-term debt (44,700) (157,319) Dividends paid (9,671) (9,404) Purchases of common stock (8,853) -- Proceeds from borrowings 19,786 122,360 Proceeds from exercise of stock options 809 348 ---------- ---------- Net cash used in financing activities (42,629) (44,015) ---------- ---------- Net effect of foreign exchange on cash 1,229 (1,739) ---------- ---------- (Decrease) increase in cash and cash equivalents (30,836) 14,694 ---------- ---------- Cash and cash equivalents at end of period $17,785 $35,874 ========== ==========
See accompanying notes to the consolidated financial statements. Page 8 ALBEMARLE CORPORATION AND SUBSIDIARIES NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS ---------------------------------------------- (In Thousands Except Per-Share Amounts) (Unaudited) 1. In the opinion of management, the accompanying consolidated financial statements of Albemarle Corporation and Subsidiaries ("Albemarle" or "the Company") contain all adjustments necessary to present fairly, in all material respects, the Company's consolidated financial position as of June 30, 2000, and December 31, 1999, the consolidated results of operations and comprehensive income for the three- and six-month periods ended June 30, 2000, and 1999, and condensed consolidated cash flows for the six-month periods ended June 30, 2000, and 1999. All adjustments are of a normal and recurring nature. These consolidated financial statements should be read in conjunction with the consolidated financial statements and notes thereto included in the Company's 1999 Annual Report & Form 10-K filed on March 22, 2000. The December 31, 1999, consolidated balance sheet data was derived from audited financial statements, but does not include all disclosures required by generally accepted accounting principles. The results of operations for the three- and six-month periods ended June 30, 2000, are not necessarily indicative of the results to be expected for the full year. Certain amounts in the accompanying consolidated financial statements and notes thereto for the three-month and six-month periods ended June 30, 2000, have been reclassified to conform to the current presentation. 2. Long-term debt consists of the following:
June 30, December 31, 2000 1999 ------------ ------------ Variable-rate bank loans $104,500 $128,700 Foreign borrowings 17,442 18,966 Industrial revenue bonds 11,000 11,000 Miscellaneous 1,066 1,094 ------------ ------------ Total 134,008 159,760 Less amounts due within one year 305 779 ------------ ------------ Long-term debt $133,703 $158,981 ============ ============
On March 10, 1999, the Company entered into a Loan Agreement with Columbia County, Arkansas, which issued $11,000 in Tax Exempt Solid Waste Disposal Revenue Bonds ("Tax Exempt Bonds") for the purpose of financing various solid waste disposal facilities at the Company's Magnolia, Arkansas South Plant. The presently unexpended proceeds from the Tax Exempt Bonds of $1,869 are restricted to the purchase of solid waste disposal facilities and accordingly, are reflected as a noncurrent asset in the balance sheet caption -- Other assets and deferred charges. The Tax Exempt Bonds bear interest at a variable rate that approximates 65% of the federal funds rate. The Tax Exempt Bonds will mature in 21 years and are collateralized by a transferable irrevocable direct pay letter of credit. 3. On June 29, 2000, the Company acquired the PYRO-CHEK(R) flame retardant business, along with a plant at Port-de-Bouc, France, from Ferro Corporation. The purchase price is subject to adjustments based upon certain contingencies. The assets purchased consist primarily of property, plant and equipment, goodwill and intangibles and inventory. Page 9 ALBEMARLE CORPORATION AND SUBSIDIARIES NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS ---------------------------------------------- (In Thousands Except Per-Share Amounts) (Unaudited) 4. Cost of goods sold includes foreign exchange transaction gains of $879 and $1,036, and $1,298 and $3,617 for the three- and six- months ended June 30, 2000, and 1999, respectively. 5. In April 2000, the Company made a change in election in certain of its pension annuity contracts. This election resulted in the recognition of a one-time noncash special accounting settlement gain of $15,900 ($10,128 after income taxes), or 22 cents per share on a fully diluted basis, in accordance with SFAS No. 88 "Employer's Accounting for Settlements and Curtailments of Defined Pension Plans and Termination Benefits". The special item gain did not effect any retiree benefits or benefit programs of the Company. 6. In May 1999, the Company, through its affiliate Albemarle UK Holdings Limited, sold to ISPG, Plc, the competing bidder, for an aggregate consideration of $157,516 resulting in a gain of $22,054 ($14,381 after income taxes), net of expenses or 30 cents per share on a fully diluted basis, 58,394,049 common shares of Albright & Wilson plc ("Albright & Wilson"), a United Kingdom chemicals company, which shares were acquired in March 1999, as part of an unsuccessful offer for Albright & Wilson. The proceeds from the sale of the Albright & Wilson common shares were primarily used to pay down debt under the Company's existing Competitive Advance and Revolving Credit Agreement. 7. Special charges for the three- and six-months ended June 30, 1999, totaling $5,779 ($3,587 after income taxes) or 7 cents per share on a fully diluted basis, resulted from work-force reductions primarily at the Company's administrative offices in Baton Rouge, Louisiana and its Pasadena, Texas plant. The program impacted a total of 74 salaried and wageroll employees. 8. The significant differences between the U.S. federal statutory income tax rate on pretax income and the effective income tax rate for the three- and six-months periods ended June 30, 2000 and 1999, respectively are as follows:
% of Income Before Income Taxes -------------------------------------------------- Three Months Ended Six Months Ended June 30, June 30, ---------------------- ---------------------- 2000 1999 2000 1999 ---------- ---------- ---------- ---------- Federal statutory rate 35.0% 35.0% 35.0% 35.0% Foreign sales corporation benefit (1.4) (1.4) (1.5) (1.5) State taxes, net of federal tax benefit 0.8 0.6 0.7 1.2 Depletion (0.8) (0.9) (0.8) (0.9) Other (2.6) 0.8 (2.4) (0.3) ---------- ---------- ---------- ---------- Effective income tax rate 31.0% 34.1% 31.0% 33.5% ========== ========== ========== ==========
Page 10 ALBEMARLE CORPORATION AND SUBSIDIARIES NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS ---------------------------------------------- (In Thousands Except Share Amounts) (Unaudited) 9. Basic and diluted earnings per share for the three- and six-month periods ended June 30, 2000, and 1999, are calculated as follows:
Three Months Ended Six Months Ended June 30, June 30, ---------------------- ---------------------- 2000 1999 2000 1999 ---------- ---------- ---------- ---------- Basic Earnings Per Share Numerator: Income available to stockholders, as reported $33,813 $24,613 $62,361 $47,785 ---------- ---------- ---------- ---------- Denominator: Average number of shares of common stock outstanding 45,795 47,033 45,939 47,025 ---------- ---------- ---------- ---------- Basic earnings per share $ .74 $ .52 $ 1.36 $ .02 ========== ========== ========== ========== Diluted Earnings Per Share Numerator: Income available to stockholders, as reported $33,813 $24,613 $62,361 $47,785 ---------- ---------- ---------- ---------- Denominator: Average number of shares of common stock outstanding 45,795 47,033 45,939 47,025 Shares issuable upon exercise of stock options 813 698 634 713 ---------- ---------- ---------- ---------- Total shares 46,608 47,731 46,573 47,738 ---------- ---------- ---------- ---------- Diluted earnings per share $ .73 $ .52 $ 1.34 $ 1.00 ========== ========== ========== ==========
The three- and six-months ended June 30, 2000, average number of shares of common stock outstanding includes the effects of the purchase of 182,000 and 675,400 common shares in the third and fourth quarters of 1999 and the purchase of 491,400 common shares in the first quarter of 2000. Page 11 ALBEMARLE CORPORATION AND SUBSIDIARIES NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS ---------------------------------------------- (In Thousands Except Share Amounts) (Unaudited) 10. The Company is a global manufacturer of specialty polymer and fine chemicals, currently grouped into two operating segments: Polymer Chemicals and Fine Chemicals. The operating segments were determined based on management responsibility. The Polymer Chemicals segment is comprised of flame retardants, organometallics and catalysts, and polymer additives and intermediates. The Fine Chemicals' segment is comprised of agrichemicals, bromine and derivatives, pharmachemicals, potassium and chlorine chemicals, and surface actives. Segment data includes intersegment transfers of raw materials at cost, except for flame retardants which are accounted for at an intersegment transfer price, and foreign exchange gains and losses as well as allocations for certain corporate costs and the effects of special items. Corporate and other expenses include corporate-related items not allocated to the reportable segments and the effects of special items. See Tables below:
For The Quarter Ended June 30 -------------------------------- 2000 1999 ---- ---- Revenues Income Revenues Income ---------- ---------- ---------- ---------- Polymer Chemicals $125,629 $32,461 $103,085 $14,134 Fine Chemicals 100,577 19,803 97,726 9,258 ---------- ---------- ---------- ---------- Segment totals $226,206 52,264 $200,811 23,392 ========== ========== Corporate and other expenses (2,399) (5,440) ---------- ---------- Operating profit 49,865 17,952 Interest and financing expenses (1,224) (2,847) Gain on sale of Albright & Wilson stock, net -- 22,054 Other income, net 363 167 ---------- ---------- Income before income taxes $49,004 $37,326 ========== ==========
Page 12 ALBEMARLE CORPORATION AND SUBSIDIARIES NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS ---------------------------------------------- (In Thousands Except Share Amounts) (Unaudited) 10.Continued
For The Quarter Ended June 30 --------------------------------- 2000 1999 ---- ---- Revenues Income Revenues Income ---------- ---------- ---------- ---------- Polymer Chemicals $253,842 $59,389 $210,475 $36,547 Fine Chemicals 207,844 41,709 198,681 29,030 ---------- ---------- ---------- ---------- Segment totals $461,686 101,098 $409,156 65,577 ========== ========== Corporate and other expenses (9,065) (11,381) ---------- ---------- Operating profit 92,033 54,196 Interest and financing expenses (2,991) (5,319) Gain on sale of Albright & Wilson stock, net -- 22,054 Other income, net 1,336 980 ---------- ---------- Income before income taxes $90,378 $71,911 ========== ==========
11. In June 2000, the FASB issued SFAS No. 138, "Accounting for certain Derivative Instruments and Certain Hedging Activities -- an amendment of FASB No.133". SFAS No. 138 amends SFAS No. 133 which established accounting and reporting standards for derivative instruments, including certain derivative instruments embedded in other contracts, and hedging activities. It requires that an entity recognize all derivatives as either assets or liabilities in the statement of financial position and measure those instruments at fair value. The Company has not determined an adoption date for SFAS No. 133, as amended. At the time of adoption, SFAS No. 133 is not expected to have a material impact on the financial position or results of operations of the Company. Page 13 ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF RESULTS OF OPERATIONS AND FINANCIAL CONDITION ----------------------------------------------------------------- The following is management's discussion and analysis of certain significant factors affecting the results of operations of Albemarle Corporation and Subsidiaries ("Albemarle" or "the Company") during the periods included in the accompanying consolidated statements of income and changes in the Company's financial condition since December 31, 1999. Some of the information presented in the following discussion constitutes forward-looking comments within the meaning of the Private Securities Litigation Reform Act of 1995. Although the Company believes its expectations are based on reasonable assumptions within the bounds of its knowledge of its business and operations, there can be no assurance that actual results will not differ materially from its expectations. Factors which could cause actual results to differ from expectations include, without limitation, the timing of orders received from customers, the gain or loss of significant customers, competition from other manufacturers, changes in the demand for the Company's products, increases in the cost of the products, changes in the market in general, fluctuations in foreign currencies and significant changes in new product introduction resulting in an increase in capital project requests and approval leading to additional capital spending. RESULTS OF OPERATIONS SECOND QUARTER 2000 COMPARED WITH SECOND QUARTER 1999 ----------------------------------------------------- Net sales for the second quarter of 2000 amounted to $226.2 million, up 13% or $25.4 million from second quarter 1999 net sales of $200.8 million due to higher shipments in most businesses partially offset by lower pricing. The gross profit margin increased to 29.2% in 2000 from 28.6% for the corresponding period in 1999. Excluding special items, second quarter 2000 operating profit was up 43.1% or $10.2 million from 1999 primarily due to higher shipments and improved plant utilization in most businesses as well as work force reductions effected during the last three quarters of 1999, offset, in part, by higher raw material costs and lower sales prices. Including special items consisting of a second-quarter 2000 special noncash accounting settlement gain of $15.9 million, resulting from an election made to close certain pension contracts in the Company's pension plans, and a second-quarter 1999 special charge of $5.8 million for work-force reductions at certain of the Company's facilities, second-quarter 2000 operating profit was up 177.8%, or $31.9 million from 1999. Selling, general and administrative expenses and research and development expenses, decreased 5% or $1.6 million in the second quarter of 2000 from second quarter 1999 primarily due to more focused new product development consisting primarily of lower employee related costs resulting from work-force reductions effected during the last three quarters of 1999 and lower outside research and development contracted services in the 2000 period. As a percentage of net sales, selling, general and administrative expenses, including research and development expenses, were 14.2% in 2000 versus 16.8% in the 1999 quarter. Page 14 OPERATING SEGMENTS Net sales by reportable business operating segments for the second quarter periods ended June 30, 2000, and 1999 are as follows:
Net Sales ---------------------- 2000 1999 ---------- ---------- Polymer Chemicals $125,629 $103,085 Fine Chemicals 100,577 97,726 ---------- ---------- Segment totals $226,206 $200,811 ========== ==========
Polymer Chemicals' net sales for the second quarter of 2000 were up 22% or $22.5 million from second quarter 1999 primarily due to higher shipments in flame retardants partially offset by lower pricing. Shipments of organometallics and catalysts, and polymer additives and intermediates were also up during the 2000 period. Fine Chemicals' net sales for the second quarter of 2000 were up 3% or $2.9 million from second quarter 1999 primarily due to higher shipments in pharmaceuticals and surface actives, offset in part, by lower pricing. Shipments were down significantly in agrichemicals for second quarter 2000 from the corresponding second quarter period in 1999 and the first quarter of 2000. Operating profit by reportable business operating segments for the second quarter periods ended June 30, 2000, and 1999 are as follows:
Operating Profit ---------------------- 2000 1999 ---------- ---------- Polymer Chemicals $32,461 $14,134 Fine Chemicals 19,803 9,258 ---------- ---------- Segment totals 52,264 23,392 Corporate and other expenses (2,399) (5,440) ---------- ---------- Operating profit $49,865 $17,952 ========== ==========
Polymer Chemicals' second quarter 2000 segment operating profit was up 130%, or $18.3 million, from second quarter 1999, primarily due to higher shipments in flame retardants and improved plant utilization, offset in part, by higher raw material costs and lower sales prices. Polymer Chemicals' second quarter 2000 segment operating profit also includes an allocation of $6.0 million related to the one-time special SFAS No. 88 settlement gain. The improvement in 2000 also reflects the impact of an allocation of approximately $2.9 million for the work-force reduction special charges in 1999 as well as the write-off of $2.4 million for certain redundant flame retardant plant assets in the 1999 second quarter. Fine Chemicals' second quarter 2000 segment operating profit was up approximately 114% or $10.5 million from second quarter 1999 primarily due to the allocation of approximately $6.2 million related to the one-time special SFAS No. 88 settlement gain. The improvement in 2000 also reflects the impact of an allocation of approximately $2.9 million for the work-force reduction special charges in 1999. Corporate and other expenses were down 56% or $3.0 million from second quarter 1999 due to an allocation of approximately $3.7 million related to the one-time special SFAS No. 88 settlement gain. Page 15 INTEREST AND FINANCING EXPENSES Interest and financing expenses for the second quarter of 2000 decreased to $1.2 million from $2.8 million for second quarter 1999 primarily due to lower average outstanding debt in the 2000 period. GAIN ON SALE OF INVESTMENT IN ALBRIGHT & WILSON STOCK, NET Second quarter 1999 results include the gain of $22.1 million ($1.4 million after income taxes), net of expenses, from the sale of the Company's investment in Albright & Wilson common stock acquired in March 1999. INCOME TAXES The second quarter of 2000 effective income tax rate was 31.0%, down from 34.1% in the 1999 quarter which benefited from a tax planning strategy in 1999 that resulted in a 1999 annual effective income tax rate of 31.0%. RESULTS OF OPERATIONS SIX MONTHS 2000 COMPARED WITH SIX MONTHS 1999 --------------------------------------------- Net sales for the first six months of 2000 amounted to $461.7 million, an increase of 13% or $52.5 million from the corresponding period of 1999, due to higher shipments in most businesses partially offset by lower pricing. The gross profit margin decreased to 30.5% in 2000 from 31.5% in the 1999 period. Excluding special items, six months 2000 operating profit was up 26.9% or $16.2 million from 1999 primarily due to higher shipments, improved plant utilization in most businesses and lower selling, general and administrative expenses, including research and development expenses as well as the favorable effects of work force reductions which occurred during the last three quarters of 1999, offset, in part, by higher raw material costs and lower sales prices as well as the unfavorable effects of foreign exchange in 2000 versus the corresponding period in 1999. Including special items consisting of an April 2000 special noncash accounting settlement gain of $15.9 million, resulting from an election made to close certain pension contracts in the Company's pension plans, and a second-quarter 1999 special charge of $5.8 million for work-force reductions at certain of the Company's facilities, six months 2000 operating profit was up 69.8%, or $37.8 million from 1999. Selling, general and administrative expenses, combined with research and development expenses, decreased 6% or $4.2 million for the first six months of 2000 versus the corresponding period in 1999 due to more focused new product development consisting primarily of lower employee related costs resulting from work-force reductions effected during the last three quarters of 1999 and lower outside research and development contracted services in the 2000 period. As a percentage of net sales, selling, general and administrative expenses, including research and development expenses, were 14% in 2000 versus 16.8% in the 1999 six month period. Page 16 OPERATING SEGMENTS Net sales by reportable business operating segments for the six-month periods ended June 30, 2000, and 1999 are as follows:
Net Sales ---------------------- 2000 1999 ---------- ---------- Polymer Chemicals $253,842 $210,475 Fine Chemicals 207,844 198,681 ---------- ---------- Segment totals $461,686 $409,156 ========== ==========
Polymer Chemicals' net sales for the first six months of 2000 were up 21% or $43.4 million from the corresponding period of 1999 primarily due to higher shipments in flame retardants partially offset by lower pricing. Shipments of organometallics and catalysts, and polymer additives and intermediates were also up during the 2000 period. Fine Chemicals' net sales for the six months of 2000 were up 5% or $9.2 million from six months 1999 primarily due to higher shipments in pharmaceuticals and surface actives, offset in part, by lower pricing. Shipments were down significantly in agrichemicals for the first six months of 2000 from the corresponding six months period in 1999 and the first quarter of 2000. Operating profit by reportable business operating segments for the six-month periods ended June 30, 2000, and 1999 are as follows:
Operating Profit ---------------------- 2000 1999 ---------- ---------- Polymer Chemicals $59,389 $36,547 Fine Chemicals 41,709 29,030 ---------- ---------- Segment totals 101,098 65,577 Corporate and other expenses (9,065) (11,381) ---------- ---------- Operating profit $92,033 $54,196 ========== ==========
Polymer Chemicals' segment operating profit for the first six months of 2000 was up 63%, or $22.8 million, from six months 1999, primarily due to higher shipments in flame retardants and improved plant utilization, offset in part, by higher raw material costs and lower sales prices. Polymer Chemicals' second quarter 2000 segment operating profit also includes an allocation of $6.0 million related to the one-time special SFAS No. 88 settlement gain. The improvement in 2000 also reflects the impact of an allocation of approximately $2.9 million for the work-force reduction special charges in 1999 as well as the write off of $2.4 million for certain redundant flame retardant plant assets in the 1999 second quarter. Fine Chemicals' segment operating profit for the first six months of 2000 was up approximately 44% or $12.7 million from the 1999 six-months period primarily due to the allocation of approximately $6.2 million related to the one-time special SFAS No. 88 settlement gain. The improvement in 2000 also reflects the impact of an allocation of approximately $2.9 million for the work-force reduction special charges in 1999. Corporate and other expenses were down 20% to $2.3 million from the six-month 1999 period due to an allocation of approximately $3.7 million related to the second quarter 2000 one-time special SFAS No. 88 settlement gain. Page 17 INTEREST AND FINANCING EXPENSES Interest and financing expenses for the first six months of 2000 decreased to $3 million from $5.3 million in the corresponding period of 1999 primarily due to lower average outstanding debt in the 2000 period. GAIN ON SALE OF INVESTMENT IN ALBRIGHT & WILSON STOCK Results for the first six months of 1999 include the gain of $22.1 million ($14.4 million after income taxes), net of expenses, from the sale of the Company's investment in Albright & Wilson common stock acquired in March 1999. INCOME TAXES The effective income tax rate for the first six months of 2000 was 31.0%, down from 33.5% in the 1999 quarter which benefited from a tax planning strategy in 1999 that resulted in a 1999 annual effective income tax rate of 31.0%. FINANCIAL CONDITION AND LIQUIDITY --------------------------------- Cash and cash equivalents at June 30, 2000, were $17.8 million, representing a decrease of $30.8 million from $48.6 million at year end 1999. Cash flows provided from operating activities of $76 million (which included a working capital increase of $11 million) for the first six months of 2000 together with $30.8 million of existing cash and cash equivalents and proceeds from borrowings of $20 million were used to cover the acquisition of the Ferro brominated polystyrene business, capital expenditures, repayment of debt, payment of dividends, purchase of common shares of the Company, and investments in joint ventures and nonmarketable securities. The Company anticipates that cash provided from operations in the future will be sufficient to pay its operating expenses, satisfy debt-service obligations and make dividend payments. The change in the Company's accumulated other comprehensive income account from December 31, 1999, was primarily due to foreign currency adjustments, net of related deferred taxes, primarily related to the strengthening of the U.S. Dollar versus the Euro. The noncurrent portion of the Company's long-term debt amounted to $133.7 million at June 30, 2000, compared to $159 million at the end of 1999. The Company's long-term debt, including the current portion, as a percentage of total capitalization, amounted to 20.1% at June 30, 2000. The Company's capital expenditures in the first six months of 2000 were lower than the same period of 1999. Capital expenditures for the year 2000 are forecasted to be lower than the 1999 level. Capital spending will be financed primarily with cash flow from operations with any additional cash provided from additional debt. The amount and timing of any additional borrowing will depend on the company's specific cash requirements. The Company is subject to federal, state, local and foreign requirements regulating the handling, manufacture and use of materials some of which may be classified as hazardous or toxic by one or more regulatory agencies), the discharge of materials into the environment and the protection of the environment. To the best of the company's knowledge, it currently is complying with and expects to continue to comply in all material respects with existing environmental laws, regulations, statutes and ordinances. Such compliance with federal, state, local and foreign environmental protection laws has not in the past had, and is not expected to have in the future, a material effect on earnings or the competitive position of Albemarle. Among other environmental requirements, the Company is subject to the federal Superfund law, and similar state laws, under which the Company may be designated as a potentially responsible party and may be liable for a share of the costs associated with cleaning up various hazardous waste sites. Page 18 ADDITIONAL INFORMATION ---------------------- OUTLOOK For Polymer Chemicals, our flame retardants business, which has exhibited strong volume growth for the first half of year 2000, has a goal of maintaining market share and improving prices. We are working hard to integrate quickly the brominated polystyrene products, acquired in the Ferro acquisition, into our markets. In catalysts and additives, we will be rolling out PolymerAdditives.com in the fall as a B2B Internet joint venture with GE Specialty Chemicals and Cytec Industries. This venture will include flame retardants. For Fine Chemicals, our agrichemicals' business has been depressed in the first half of year 2000 versus the same period in 1999. This remains an area of concern as we look to the fourth quarter for indications that the U.S. farm economy is strengthening, a key driver for this business recovery. We are cautiously optimistic for improvements in the third and fourth quarters of 2000, but we expect it will be difficult to achieve by the end of the year the same profitability levels we reached in 1999. For pharmachemicals, ibuprofen is doing well however, our advanced intermediates and new products efforts are not yet yielding acceptable results. In surface actives, where Cytec Industries is our exclusive partner for distributing our alkenyl succinic anhydride ("ASA") sizing agent, we are watching the developments surrounding the disposition of their paper chemicals' business and will have to wait on that outcome to determine the effect, if any, on our ASA business. In zeolites, we expect to feel the impact of the declining North American powdered laundry detergent market, possibly as early as the fourth quarter of 2000. The price pressure resulting from the penetration of liquids and a potential new competitor has lowered appreciably our view of the future returns in this business. In bromine & derivatives we hope to see improved results later in the year as we have plans to run our assets hard to keep up with demand, especially in flame retardants, plus we will have the new bromine plant capacity in Arkansas that will supply additional bromine. We are also working with our oil field customers to use our product line extensions to expand our completion fluids business. With the expected continuation of raw material price pressure in the second half of 2000, earnings comparisons for the second half with the comparative periods in 1999 will not be as easy as in the first half, however, we still expect to have a good year overall. The first six months of 2000 results have benefited from our overall cost reduction efforts, which we believe will continue to have a positive effect on our earnings for the balance of the year in contributing to our 15% earnings improvement goal over 1999. Some of the information presented in the above discussion may constitute forward-looking comments within the meaning of the Private Securities Litigation Reform Act of 1995. Although the Company believes its expectations are based on reasonable assumptions within the bounds of its knowledge of its business and operations, there can be no assurance that actual results will not differ materially from its expectations. Factors that could cause actual results to differ from expectations include, without limitation, the timing of orders received from customers, the gain or loss of significant customers, competition from other manufacturers, changes in the demand for the Company's products, increases in the cost of the products, changes in the market in general, fluctuations in foreign currencies and significant changes in new product introduction resulting in an increase in capital project requests and approvals leading to additional capital spending. Additional information regarding the Company, its products, markets and financial performance is provided at the Company's Internet web site, www.Albemarle.com. Page 19 ITEM 3. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK ---------------------------------------------------------- There have been no significant changes in our interest rate risk and the marketable security price risk from the information provided in our Form 10-K for the year ended December 31, 1999. The Company has exposure to volatility in pricing of certain of its raw materials. Changes in pricing of these raw materials and the timing of these changes could have a significant impact on operating profits. The Company's foreign currency risk has changed from that disclosed in our Form 10-K for the year ended December 31, 1999. At June 30, 2000, and December 31, 1999, the Company had entered into Japanese Yen forward contracts in the amount of $ 1.9 million and $10.8 million, respectively, all with maturity dates in 2000. Part II - OTHER INFORMATION --------------------------- ITEM 3. Legal Proceedings The Company and its subsidiaries are involved from time to time in legal proceedings of types regarded as common in the Company's businesses, particularly administrative or judicial proceedings seeking remediation under, or alleging noncompliance with environmental laws and products liability or tort litigation. While it is not possible to predict or determine the outcome of the proceedings presently pending, in the Company's opinion they should not result ultimately in liabilities likely to have a material adverse effect upon the results of operations or financial condition of the Company and its subsidiaries on a consolidated basis. ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K (a) Exhibits 27. Financial Data Schedule (b) No report on Form 8-K was filed during second quarter 2000. Page 20 SIGNATURES ---------- Pursuant to the requirements of the Securities Exchange Act of 1934, the registrant has duly caused this report to be signed on its behalf by the undersigned thereunto duly authorized. ALBEMARLE CORPORATION --------------------- (Registrant) Date: August 4, 2000 By: /s/Robert G. Kirchhoefer ----------------------- Treasurer and Chief Accounting Officer (Principal Accounting Officer)